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CLAIMS AND VARIATIONS IN CONSTRUCTION CONTRACTS

Presented by : V . K. Trikha P. Manavalan

A. CLAIMS What is claim? A claim is a disguised form of blackmail. A claim is the last chance to bail out a losing job. A claim is an assertion to a contractual right. Claim - extra money, an extra to the contract price.

Claims a common occurrence in the construction industry. Claims occur when one of the parties to a contract seeks consideration, change, or both from an expressed or implied contract provision. Which comes first,the dispute or the claim? The dispute comes first, because the paper work falls behind the progress of the work. In some cases, a claim is filed by a Contractor with little or no forewarning, and this itself gives rise to a dispute. Contractor's Claim A legitimate request for additional compensation (costs and / or time) on account of a change in the terms of the contract. Some claims are legitimate and do not give rise to disputes or confrontation between the owner and the contractor. Two situations The owner and the contractor can come to an agreement on the claim and then the owner issues a change order. If the parties disagree a dispute arises which must be resolved.

A 2. CAUSES OF CLAIMS Contract documents Actions of parties to the Contract, including owners, designers, contractors, and suppliers. Force majeure considerations. Project characteristics. Delays are a major cause of claim.

A 2.1 Claims arising from the Contract Contracts may contain conflicting provisions in technical specifications. Exculpatory clauses : seek to exonerate the owner and transfer to others the risk for problems that arise. Disclaimers for differing site conditions, sub surface problems, and underground utility interference are typical exculpatory clauses that create disputes. The type of Contract (Fixed Price and cost reimbursable) and strategies (Unit Price Contracts, Designs build etc.) create the environment for claims. Contract language is often the source of problems that lead to claims. Ambiguities arise because of the use of vague clauses such as reasonable period of time, or equal , and in accordance with trade practices.

A 2.2 Claims due to the action of participants Incomplete information on drawings and design errors are the leading causes of claims. A/E failure to perform,and in a timely manner Drawing review, change order approval, inspections, clarification of drawings and specifications, and correction of design errors. A lack of design coordination and inadequate design review. Claims arise because of unrealistic contract schedule, attempts to fast track the schedule, performance specifications, and underestimated project cost. Contractors are often the cause of claims. Underbidding leads to a claims mentally because the contractor will attempt to mitigate the forecasted loss if the bid price is below the anticipated cost. Poor construction quality is a Common source of claim.

Inadequate performance by a contractor usually results in cost overruns which likely will lead the contractor to recover the cost overrun through claims . The lack of coordination of Contractors and suppliers is often a problem which creates conflicts and claims. Owners contractual responsibilities Permits and licenses, timely award of contract, and adequate financing resources to meet progress billing.

2.3 Force Majeure causes of claims Force Majeure clauses refers to occurrences which are beyond the reasonable control of any party to the construction contract. These are stated as Acts of God or unavoidable casualty. Claims for a time extension are usually permitted. These claims are due to severe weather, floods, fire, sabotage, and so on. 2.4 Project Causes of Claims Projects that are complex, large, remotely located, in congested areas, or require technology at the cutting edge are subject to construction claims. Examples : Nuclear power plants, process plants, unique structures, underground construction, earthworks and renovation projects.

2.5 Delay Claims

Standard Construction Contracts recognize the following delays: a) Excusable delay entitles a contractor to a time extension. These arise because of owner initiated actions or changes, severe weather and other force majeure considerations and design problems. b) Inexcusable delay Caused by events which should have been reasonably expected or generally of the Contractors own making. c) Compensable delay entitles a contractor to both an extension of time and additional compensations. Examples: change in scope, late supply of owner materials or information, impeded site access, out of sequence work requested by owner, and differing site conditions. Delay not to be confused with the concept of suspension or disruption of the work. Suspension is a temporary work stoppage that may or may not delay the project. Disruption is the interruption of the Contractors planned work flow, but may not involve any delay.

A 3. CLAIMS AVOIDANCE A claim may arise under any form of construction Contract. Fixed Price contracts attract more claims than costreimbursable contracts. To avoid claims, through consideration be given to the contracting method before proposals are accepted from the contractors. The owner and the Engineer can undertake lengthy and detailed investigations of the project before the contract is awarded and select the form of contract that suits the situation. Fair allocation of risk and incentives for cooperation are also good prevention methods. An owner can prevent claims by creating a climate of cooperation on a project. Three simple rules to avoid making claims : (For contractor) Know exactly what the contract requires. Do what the contract requires, but without interference. Dont do anything else, without proper documentation.

4. a.

TYPES OF CONSTRUCTION CLAIMS Directed Changes : Change in the Contractors Scope of work. The change might be an addition or deletion of work or the use of different methods,materials or designs. By definition,the owner recognizes the existence of a directed change. Directed change involves either a written or verbal instruction to change some aspect of the work. Differing Site Conditions : Also known as Changed Conditions, usually involves variations from sub surface or foundations conditions as stated in the contract. Can be any site conditions that deterimentally affect the work performance and that could not have been known or reasonably anticipated at the time the parties entered into the contract.

b.

c.

Defective & Deficient Contract Documents : Also known as Errors & Omissions. Usually concerns errors and omissions in the contract drawings, specifications, or the contract language. Superior Knowledge : Used to support allegations that the owner knew facts that were not disclosed at the pre-contract stage and that had a significant impact on Contractors Performance. Constructive Change: Applies to contract modifications that develop gradually and are created without notice or knowledge. Difficult to document since the effects of changes do not manifest themselves until after the project has been completed or is near completion.

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Delay : A delay situation is one in which the activity of one party is impeded by the inactivity, inability, or constraint of another party. When a delay occurs, the impacted party should go on record and , if possible, document any resulting effects connected to the delay. Acceleration : When the work scope is increased but the schedule is not modified to accommodate this increase. Also applies to situations in which the contractor is required to complete work in advance of agreed schedule. Interference : This claim situation frequently involves third party constraints or disruptive influences imposed by the owners contract administrations.

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h.

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Other construction claim type about which owner should possess a fundamental knowledge include: Suspension. Breach of Contract Termination Inclement Weather Warranty Strikes Impossibility of Performance. Owner furnished items.

A5 i) ii) iii) iv) v) vi)

Claims Settlement Methods : Claims are settled by one or more of the following methods. Negotiation Dispute Review Boards (DRB) Mediation Minitrials Arbitration Litigation Often a claim may progress through several different methods before final settlement is achieved.

i)

Negotiation : Most claims begin with negotiation. It involves two parties who agree to Communicate with each other and make decisions. The parties reach an agreement which is a modification to the contract. Negotiation is the least costly and the most flexible method of dispute resolution, allowing a high degree of control over issues and the time factors. The matter in question can remain confidential. Most likely to preserve the ongoing business relationship of parties. Dispute Review Boards (DRB) : DRB are formed at the inception of the project and remain through- out construction. Disputes are heard as they arise and resolution are arrived at in a timely manner. DRBs consist of industry experts who make non binding recommendations for the settlement of each dispute.

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DRB fosters co-operation between the contractor and the owner, and provide a means for prompt and equitable resolution of claims and disputes. DRB is an intermediate step aimed at avoiding more expensive and less satisfactory procedures. A DRB emphasizes dispute prevention. Mediation : Provision for mediation is usually provided for by the Contract. A neutral third party, who assists in the negotiations and often proposes solutions, but does not render a binding decision. The mediation works both sides to develop and facilitate a settlement. Mediation is becoming popular because costs can be kept relatively low while producing a timely settlement. The parties maintain close control of the issues as in negotiations, but with the added benefit of an objective opinion.

iv)

Mini trials : Minitrials are also a non binding resolution procedure which follows a structured process similar to litigation and is usually conducted by a judge. Arbitration : Arbitration is stipulated by Contract or legislation or is simply agreed upon by the parties. A neutral third party acts as a decision maker for a panel which consists of representatives from the opposing sides of the dispute. The decision by the arbitrator is final and binding. Arbitration is usually less costly than going to court, and it allows greater control of both time and decision making than litigation.

v)

vi) Litigation : Final recourse as a settlement method and is utilised only when a construction claim can not be resolved by negotiation, mediation or arbitration. The most expensive process for resolving disputes. There usually are no winners in this process. A decision is rendered by a judge which is final and binding. Major disadvantage is that an engineering decision may be placed in the hands of people who have no engineering knowledge. Conclusion : Knowledge of the different construction claim types allows owners to recognize potential claims situations and can protect the owners from incurring losses and assist in recovering compensation. The parties must notify each other in a timely manner as soon as claims situation arises.

Knowledge of construction contract law is beneficial to both the owner and the contractor. Owner Contractor relationship has a great effect on the settlement of claims. For an owner, fairness pay off in the long run. According to the old axiom, remember that TIME IS MONEY. This is just as true for the owner, the consultant, the contractor and all the sub contractors.

VARIATIONS CONSTRUCTION CONRACTS


B) What is Variation? Variations in Construction Contracts can mean charges to the terms of the Contract Changes to the scope or character of the works. There is no single definition of what constitutes a variation, usually any standard form the Construction Contract will contain a definition of variation in term of specific actions and activities Contract clauses and procedures, which define what constitutes a variation and how to manage them. Variations are changes within a Contract and not Changes of the Contractbe rescinded in favour of writing another one.

B 2 Nature of Variation The nature of variations is usually defined by a variation clause in the contract. Major variations include Additions, omissions and substitutions. Changes in quality, character, form kind, position, dimension, line, level, specified sequence or method of timing of construction. Changes which cause limitations or restrictions to site access, working pace or hours. Removal from sites of any material or goods that are not in the Contracts. Opening up for inspection of any work covered up; And the replacement of any person employed in Connection with the Contract.

B 3 Issues Concerning Variation: Problems concerning variations arise in three areas : Scope (was it a variation or was the contractor bound to do it anyway?) Non-compliance with procedural requirements. Valuing Variations. B 4 Extent of Variations : The spirit in which variations are permitted is to allow the contract to proceed without re-drawing another contract to cater for the change. Only one party benefit from the variation that party should: Have to forego some advantage under the Contract. Give some service or Pay some of money for the benefit of the other party. Variations follow negations for compensation fro eth direct loss and likely loss due to disruption.

B 5 Causers and Causes of Variations The client, Consultant, Contractor and other stakeholders, cause variations. There are many reasons that may cause to initiate variations. Some of which are financial, designs aesthetic, changes in drawings, weather, geological and Geotechnical reasons. B 6 Effect of variation on Projects Variations have several effects on the project, some tangible and offers intangible. The challenges of variations as the establishment of the: Variation itself. Effect of the variation on other work. Loss and expense directly experienced arising from regular progress of work having been materially affected due to the execution of variation and for which its reimbursement is not covered by any other part of the contract.

Thank You,

V. K. Trikha P. Manavalan